Andrea Kirkby on the past, the present and the future.
MORTGAGES boom and bust
The crisis
OVERVIEW Anyone who has worked for long in the housing market knows that it goes through cycles – that some years are good, and others bad, as interest rates and the economy impact the housing market. But generally, such changes are relatively small, and gradual. The credit crunch, on the other hand, brought catastrophic change in its wake and its effect was seen nowhere more than in the mortgage market, where boom suddenly turned to bust. While some lenders had already been
raising doubts about the continuation of the boom, for instance The Mortgage Works pulled out of lending on new build as early as 2006, the mortgage crisis wasn’t directly driven by concerns about the UK housing market. Instead, it was the availability of finance
for banks and other lenders that really drove the market into crisis; so understanding what’s been happening in the mortgage sector requires an understanding of the global capital markets, and in particular the way lenders are financed (whether through retail deposits, or through the issue of bonds and other securities).
18 AUGUST 2011 PROPERTYdrum John Heron, Managing Director of
Paragon Mortgages, says that the whole market froze up after the 2007 collapse of the US mortgage market, and the bankruptcy of Lehman Brothers in 2008. “The credit crisis was a global event of tsunami proportions,” he explains, “and was not a respecter of size or quality or brand or function, it affected all financial institutions. Unless you had access to taxpayer money, you couldn’t write new business.” Lenders who were unable to secure financing to support further lending had little choice but to draw in their horns; some lenders without a retail deposits base had to stop lending altogether. The numbers tell the story; the mortgage
market completely dried up. Gross mortgage lending fell from £362 billion in 2007 to just £135.9 billion in 2010, only just more than a third of the earlier total, according to figures from the Council of Mortgage Lenders (CML). Loan to value (LTV) requirements tightened from 95 per cent (as early as 1994) to 77 per cent in 2010, that is, required deposits rose from 5 per cent to 23 per cent, almost destroying the first time buyer market. And the number of total products available fell to an all time low of 1097 in 2009, according to Moneyfacts (it has now more than doubled to 2447).
Changes in the mortgage market were
not restricted to frozen credit markets. In what could be interpreted as an attempt to bar the stable door after the horse had bolted, regulatory authorities forced lenders to hold higher amounts of capital. At the same time, low interest rates made it difficult for banks and building societies to attract deposits from savers. Lenders in the UK also faced increased pressure to help borrowers who had got into difficulty, rather than repossessing properties; that was very different from what happened in the US, and also rather different from what happened in the late 1980s property market crash.
THE THAW The credit markets are still volatile; anxiety over a potential default by Greece, for instance, has seen both bond and equity markets seesawing in recent weeks. However, the credit freeze has gradually thawed; it’s possible to raise funds again, and investors have returned to the market. Some lenders have disappeared. Victoria
Mortgages went under in September 2007, perhaps unsurprising since it specialised in the by then untouchable and unfundable subprime sector. Future Mortgages, a subsidiary of Citi Group, stopped new lending in May 2008; Edeus and Money
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